Ah, the fiscal cliff. It looks like we managed to scrape by only a day late and with some politicians damaged. However, there are more cliffs on the way. Perhaps even in your family business.
In the waning days of 2012, estate planning attorneys, CPAs and trust officers across the country were scrambling to transfer funds and set up trusts, all in an effort to guard against the possible doomsday scenario on Jan. 1, 2013 when the lifetime gift exclusion ratcheted back to a possible $1 million and the tax rate on estates over the exclusion reverted back to 55 percent from 35 percent. Mark Costley, president of the Durham Orange Estate Planning Council, describes it this way: “Professionals in our field were simply overwhelmed with work. I would say there was more activity at the end of this year than we’ve seen in the past four to five years combined.”
Alas, with multiple contortions, furthering our discontent with our government’s leadership, Congress averted a disaster after the last minute. The outcome from an estate tax perspective is that the $5 million exclusion will stay in place, and will have an automatic annual increase mechanism built in. However, for those with estates over the limit, the tax rate will rise from 35 percent to 40 percent.
Unfortunately, we have three more “fiscal cliffs” ahead of us – the debt ceiling, the sequester and the budget. So I suggest you continue to keep your seat belt buckled as there will certainly be more turbulence in the air.
While the term “fiscal cliff” did not make the Merriam-Webster “New Dictionary Words for 2012” along with other financial terms such as “systemic risk” and “underwater,” I am certain it will head the 2013 list. I believe this will be the definition: “a point in time where if a resolution to an issue is not agreed upon, the status quo will be immediately disrupted, creating permanent damage.”
Family businesses are also notorious for facing these kinds of “fiscal cliffs.” And with a failure rate higher than 65 percent, most do not find that resolution. Here are some of the big ones:
• Lack of planning: The leader of the family business suddenly dies or becomes disabled and there is no plan, or preparation, in place for the transition of business leadership and ownership.
• Lack of common goals: Typically siblings who are pulling in different directions, where work has not been put forth to create a resolution, someone snaps, and walks out the door.
• Lack of succession awareness: At some point the next generation, if qualified, is going to want to get their hands on the wheel. If the next generation reaches a point where they think it will never happen, they may decide to leave.
• Lack of appreciation for key employees: If key employees’ needs are not understood and addressed, they may leave.
• Lack of communication: If people are left in the dark long enough they will create their own explanations for why things are the way they are. This can result in misunderstandings that are so large they cannot be repaired.
The difference between our government’s fiscal cliffs and those of family businesses is that there are no dates on a calendar for a family business fiscal cliff. This makes it much more difficult. Many family businesses can drift along knowing there is an issue, but that it is not so hot that it must be dealt with today.
I had a client who continually tried to sweep issues under the rug. Business was going well, everyone seemed happy, how bad could things be? Once he decided it was time for him to begin stepping down, animosity arose among family members about who should lead and what direction the business should go in.
This is fairly typical behavior for an owner. They have worked years to build the business up to where they finally want it. The thought of passing it along to the next generation who might change some things can be difficult to cope with.
In the end, our country’s leaders managed to find some common ground where enough folks could agree on a path forward. But it all begins with having a good discussion about how we each see things, respecting each other, and having some trust. The same is true of any successful family businesses.
Henry Hutcheson is a nationally recognized family business speaker, author and consultant in Raleigh. He can be reached at Familybusinesscarolina.com.